I have a client who runs a small hotel and is getting himself and me confused over two VAT issues. The scenarios are as follows:-
- A customer books a function and pays a deposit of £1000 (non-refundable). The function is cancelled - is the deposit now vatable or non-vatable revenue?
- At a wedding, £1K is put behind the bar as a deposit but the wedding party only consume £500. Is the balance a vat or non-vatable service?
Thanks
Replies (10)
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In scenario 2...
... doesn't the father of the bride want the other £500 back.
In the non-refundable deposit situation, you're getting caught by the fact that the law says that anything done for a consideration is a supply of services. You haven't actually supplied anything of any worth to the customer, but you took their booking and they paid you a non-refundable amount to do so.
In scenario 1...
VAT needs to be accounted for on the payment of the deposit so the subsequent cancellation requires no action as far as VAT is concerned.
I disagree, Neil
If the intended supply is cancelled, there is no supply and therefore no VATable consideration - the VAT should be reclaimed.
The position is different if the deposit is used to reserve a room or other facilities - if the room etc is kept aside then the hotel will have made a supply so the deposit remains VATable.
Forfeit deposits
If you ask your customer for a deposit against goods or services but they then don't buy them or use the services, you may decide to keep the deposit - usually you've told your customer about this in advance and it's part of the conditions for the sale. This is called a 'forfeit' deposit. For example, hotels often ask for a deposit against a room, and may keep part or all of the deposit if the customer doesn't turn up.
You should declare VAT on the deposit when you receive the payment or when you issue the VAT invoice, whichever happens first.
If you keep the deposit because your customer changes their mind about the goods or service and doesn't want them any more, there is no VAT due. If you have already declared it on your VAT return then you need to show it on the next one as an adjustment.
http://www.hmrc.gov.uk/vat/managing/special-situations/instalments.htm
Agreed
I'd had a recollection of a decision a while back that the forfeited deposit was VATable. I couldn't recall the reasoning, but it had to involve the deposit being considered to be consideration for a supply. It seems that it was my recollection that was faulty.
For the avoidance of doubt
If the deposit is merely an advance payment that is forfeited on a no-show, then no VAT is due. But if the deposit is required in order to keep a room free then that is deemed to be a supply regardless of whether the customer shows up.
Bass plc
Well...
... with the bar, if it's essentially a minimum spend of £1,000 and people only drank drinks to the value of £500, I'd suggest that the VATable consideration for those drinks is £1,000.
709/3 HMRC interpretation / guidance
Notice 709/3 Hotels and holiday accommodation
June 2013
7.2 Cancellation charges
Normally, if you make a cancellation charge to a guest who cancels a booking, VAT
is not due, because it is compensation. This includes amounts debited from credit
cards using details provided at the time of the booking. Where the cancellation
charge takes the form of a retained deposit, you can reclaim any VAT already
accounted for as an adjustment to your next return.
But this does not apply to guaranteed rooms which you are obliged to hold for a
customer for an agreed period. Any fee charged where the room remains available to
the customer is consideration for a supply and is subject to VAT.
Where you arrange or provide any guarantee or insurance against your guest having
to pay cancellation charges, the charge you make for this may be exempt, if you hold
a “block insurance policy“. You should consult Notice 701/36, Insurance, paragraph
2.5, Insurance transactions effected by holders of block policies.
Any commission you receive from a person permitted to carry on an insurance
business under Section 2 of the Insurance Companies Act 1982 is exempt.
7.3 Booking fees
Booking fees are treated in the same way as a deposit, (see paragraph 7.1).
If you are an agent who arranges a supply on behalf of someone else you must
account for VAT on any booking fees you charge whether or not the booking is taken
up.
7.4 Retention fees
Retention fees are paid to reserve accommodation for future use and are standardrated.
However, a retention fee paid for a period of absence after the first 28 days of
a stay may benefit from the reduced value rule (see paragraph 3.3).
If the fee is no more than the amount of your charge that you treat as being for
accommodation under the reduced value rule, no VAT is due on the fee. If the fee is
more than that amount you must apportion the fee between accommodation and
facilities (see paragraph 3.2).